THE BLOG
12/31/2013 01:45 pm ET Updated Mar 01, 2014

Should You Be Worried About the Tech Start-Up Bubble?

I read an article, while still a student at the Stanford Graduate School of Business, warning readers to be "very afraid" of the tech start-up bubble. When the news hit this past fall that a record-setting 18 percent of my Stanford GSB class became entrepreneurs immediately after graduation, I heard the same worries from friends who live outside the Bay area.

As someone who spent the last two years at a graduate school in the heart of Silicon Valley, and who now works at a venture capital-backed start-up, I am constantly in conversations about the tech scene and start-ups. And I don't share the concerns others have about a start-up bubble.

There has been an "explosion" in the number of seed deals, according to CB Insights, so it's easy to see why the media have determined we are in a "start-up bubble." The record-setting number of entrepreneurial Stanford MBAs is yet another sign we are in such a bubble. But, unlike other bubbles, average Americans should not be "afraid" of this proliferation of early-stage companies. If anything, they should embrace it.

My Stanford GSB classmates are starting companies that are solving problems across a diverse set of industries. When it launches, One Patient Health seeks to reinvent mental healthcare at scale for the Internet era. IntelRiver provides B2B software to deploy customer and employee surveys. Fuse Insurance is a registered partner of the federal government and is helping individuals in three states find the right health insurance plan. Fresh out of Y-Combinator, DoorDash just raised $2.4M in funding for a food delivery service. Yard Club is creating a sharing economy for the construction equipment rental business. Those are just a few of the many.

Historically, there has been cause to worry when a high percentage of top MBAs rush into an industry. Ray Soifer's Harvard MBA contrarian market indicator signals that equity markets are due for a pullback when a relatively large percentage (30 percent or over) of Harvard Business School students take finance jobs. The indicator signaled overheated markets in 2006 before the financial crisis.

Might there be a similar indicator for Stanford MBAs and start-ups? The Stanford GSB is a funnel to entrepreneurship in the same way Harvard Business School has historically been a funnel to Wall Street. With a venture studio on campus, seasoned entrepreneurs teaching some of the most sought-after classes, and its location in the heart of Silicon Valley, the Stanford GSB inspires many students to become entrepreneurs. And Stanford MBAs are venturing out on their own more now than during the dot-com boom. According to my conversations with Stanford's Career Management Center, 12 percent of the graduating class of 1999 became entrepreneurs right after graduation. At 18 percent, that same statistic for my class is noticeably higher.

Even if the employment numbers from my Stanford class indicate we are in a start-up bubble, I don't believe it is something to be worried about. The average investor certainly shouldn't be.

Average investors only need to be concerned if the start-up bubble results in a crash in public equity markets. In the dot-com boom, tech companies with weak business models went public only to watch their stock prices nosedive months later, bringing down the rest of the markets with them. Today, there are fewer tech companies going public and they have more proven business models. What's changed? For one thing, venture capital money isn't as "widely available" as it was in the 90s.

The venture capital investing model helps ensure only the most promising start-ups make it to the public markets. VC funding is a necessary step on many start-ups' path to IPO. Crowd-funding sites, start-up incubators and angel investors can only take a business so far before it needs large capital investment to scale. Unlike in the dot-com boom, today there is a "Series A Crunch", a term used to describe how many seed-funded tech start-ups are unable to raise the millions from VCs that they need to scale and must therefore close shop. Many companies start, but only the best survive.

If past trends are any indicator, not all of my classmates' businesses will succeed. Data from Shikhar Ghosh at Harvard has shown that 95 percent of start-ups fail to meet projected returns on investment. Already, some of my classmates have moved on from their first entrepreneurial pursuit, less than a year after graduation.

Most Americans are neither start-up founders nor early-stage investors. They have little to no financial exposure to the start-up ecosystem as long as venture capital investment continues to separate the wheat from the chaff. Unlike the most recent mortgage crisis, the rise and fall of tech start-ups doesn't affect the financial health of Main Street.

For most Americans, the primary consequence of the start-up proliferation is greater innovation. It's very possible one of my classmates' businesses becomes successful at vastly improving mental health conditions or saving money for construction businesses, for example. That wouldn't be something to fear; rather, that'd be something to embrace.